In 2025 the UK equity market outperformed the US, as did many other major equity markets, including Japan, Europe, Emerging Markets and Asia Ex-Japan. The UK All Share was up 24% vs the S&P returned 17.3% in dollar terms.
Within these performance figures certain factors dominated these numbers. As you can guess in the US mega-cap and AI trends were most of last year’s performance. However, in the UK, size did matter as well with large caps performing the best returning 26%, mid-cap 13% and small caps 14%. Almost half the stocks in the 100 had gains of 20% or more. In the UK though the dominant factors which helped the UK were value and dividends, whereas quality underperformed.
To dive a bit deeper into UK value there were trends there too. Banks, defence, mining, and tobacco were the sectors to be in. Banking names like Lloyds, HSBC, Barclays, and NatWest were some of the best performers in the sector, rising by 50% last year. Defence classics BAE and Rolls-Royce were top performers, and Babcock International rose 150% last year which meant it re-entered the 100 after 7 years. Rolls-Royce is now in the top 5 UK largest companies and is expected to keep on rising. Miners Fresnillo and Endeavour had excellent years after the price of gold rose around 60% last year.
All of this is promising for the UK equity market which has struggled to compete with returns provided by the US for over a decade. Going into 2026 there are some promising tailwinds, such as improved and solid earnings outlooks along with lower interest rates. This should not only help the top 100 in the UK market but also the 250 mid-cap space which is trading on attractive valuations. The 100 is currently trading at 13.6x and the 250 at 12.2x. The dividend yield is currently 3.1% on the 100 and 4.1% on the 250.
Lower interest rates are also good for UK economy as it will hopefully encourage consumer spending. UK household savings ratio – so what is currently being saved of net pay – is around 9.5% in Q3 2025, compared to the US at around 4.7%, so you can see a healthier consumer who can deploy capital as interest rates come down. An interesting data point which a fund manager gave me was that in the US 30% of buy now, pay later loans, such as Klarna, are being used on groceries. So there is definitely a weakening consumer argument, however in the US, the top 10% are about 50% of spending in the economy.
We have been overweight the UK based on valuation and have been underweight the US and the mag-7 for years for the same reason. This helped performance last year and we see the reasons for this allocation remaining in place.
Interestingly, last week came the news that Vanguard would be reducing its UK home bias across its life strategy. UK investors hold £52 billion across the life strategies. The UK equity exposure will go from 25% to 20% and the UK bond exposure will drop from 35% to 20%. The purpose of the switch is to have a more global focus and will occur during Q2 this year.
In December last year we saw the first positive month of UK equity flows since November 2024. Despite strong performance from the UK market during the year, it took until the last month to see inflows. The flows were split between active and passive mandates. However, we have seen isolated months of inflows so we will see if this is a trend or just a blip.
The industry as a whole has been reducing its UK equity weighting for years, but this hasn’t stopped strong performance of UK companies in the recent past. This has been boosted by UK companies who have been doing significant share buybacks. Vanguard reducing its weighting is significant due to the size of the life strategy but could be an excellent opportunity to buy companies and funds on attractive valuations.
Emily Cave – Research Analyst
FPC26629
All charts and data sourced from FactSet
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